What Do Three White Soldiers Mean?

Three white soldiers is a bullish candlestick pattern that is used to predict the reversal of the current downtrend in a pricing chart. The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle's real body and a close that exceeds the previous candle's high. These candlesticks should not have very long shadows and ideally open within the real body of the preceding candle in the pattern.

What Do Three White Soldiers Tell You?

The three white soldiers candlestick pattern is typically observed as a reversal indicator, often appearing after a period of price decline. This chart pattern suggests a strong change in market sentiment in terms of the stock, commodity, or forex pair making up the price action on the chart.

When a bullish candle closes with small or no shadows, it suggests that the bulls have managed to keep the price at the top of the range for the session. Basically, the bulls take over the rally all session and closed near the high of the day for three consecutive sessions. In addition, the pattern may be preceded by other candlestick patterns suggestive of a reversal, such as a doji or a hammer.

Here is an example of three white soldiers appearing in a pricing chart for the VanEck Vectors Fallen Angel High Yield Bond exchange-traded fund (ETF).

The ETF had been in a strong bearish downtrend over the course of several weeks before the three white soldiers pattern marked a sharp bullish reversal. The pattern may suggest that the rally will continue, but traders should also look at other relevant factors before making a decision. For example, the stock may have reached an area of resistance at the conclusion of the formation of the pattern or the rise might have been on low volume which is not an indication of strength.

Example of How to Trade Three White Soldiers

Because three white soldiers is a bullish visual pattern, it is used as a potential entry or exit point for a trade. Traders who are short on the security look to exit and traders who are waiting to take a bullish position see the three white soldiers as an entry opportunity.

When trading the three white soldiers pattern, it's important to note that the strong moves higher could create temporary overbought conditions. The relative strength index (RSI), for example, may have moved above 70.0 levels. In some cases, there is a short period of consolidation following the three white soldiers pattern, but the short- and intermediate-term bias remains bullish. The significant move higher could also reach key resistance levels where the stock could experience a period of consolidation before continuing to move higher.

The Difference Between Three White Soldiers and Three Black Crows

The opposite of the three white soldiers is the three black crows candlestick pattern. Three black crows consist of three consecutive long-bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle. Whereas three white soldiers catch the momentum shift from the bears to the bulls, three black crows show the bears taking control from the bulls. The same caveats about volume and additional confirmation apply to both patterns, though confirming volume is more important in the bullish pattern.

Limitations of Using Three White Soldiers

Three white soldiers can also appear during periods of consolidation, which is an easy way to get trapped in a continuation of the existing trend rather than a reversal. One of the key things to watch is the volume supporting the formation of three white soldiers. Any pattern on low volume is suspect because it is the market action of the few rather than the many.

To combat the limitation of visual patterns, traders use the three white soldiers and other such candlestick patterns in conjunction with other technical indicators like trendlines, moving averages and bands. For example, traders may look for areas of upcoming resistance before initiating a long position or look at the level of volume on the breakout to confirm that there was a high amount of dollar volume during the move. If the pattern occurred on low volume with near-term resistance, traders should until there is further confirmation of a breakout to initiate a long position.

The Bottom Line

The three white soldiers pattern serves as a strong bullish indicator, often signaling a reversal in a downtrend. However, traders should exercise caution and corroborate this pattern with other
technical indicators and volume data to avoid false signals. It's not a standalone tool but can be highly effective when used in conjunction with other technical analysis methods.